Chapter 2

Chapter 2

Key matters raised in evidence

2.1
This chapter considers the key matters raised in evidence to the
committee with focus on the potential impact on Australian jobs of the repeal
of Part 3 of the Qantas Sale Act 1992 (Sale Act). At its centre is the
question of whether repeal of the Act, which requires most of the airline's
heavy maintenance to be carried out in Australia, would trigger the loss of
jobs in Australia by way of outsourcing and off-shoring positions and thereby potentially
impact Qantas aircraft maintenance and safety. Underpinning these concerns is
the sustainability of the Australian aviation sector and specifically Australia's
aviation maintenance, repair and overhaul capability as well as Australia's
national interest particularly during periods of national emergency.

Australia's aviation sector

2.2
In a 2011 report commissioned by the International Air Transport
Association (IATA) and based on 2009 data, Oxford Economics noted that the
aviation sector contributes $32 billion (2.6 per cent) to Australian Gross
Domestic Product (GDP) of which:

$13.5 billion directly contributed through the output of the
aviation sector (airlines, airports and ground services);

65,000 jobs supported through the spending by the employees of
the aviation sector and its supply chain.

In addition there are a further 495,000 people employed through
the catalytic (tourism) effects of aviation.[2]

2.4
In terms of Qantas, over 27,000 people are currently employed by the
airline.[3]
The IATA calculates that for every dollar an airline earns there is a threefold
impact on the economy. The Australian and International Pilots Association
(AIPA) made the point that Qantas' effect on the national economy is therefore potentially
$45 billion.[4]

2.5
Citing the Oxford Economics report which found that the productivity of
air transport services is estimate to be $205,012 per annum in gross value
added to their employer's enterprises which is 1.8 times the national average,
Mr Anthony Sheldon, National Secretary of the Transport Workers Union (TWU)
argued that aviation transport support workers are amongst the most productive
in the country.[5]

Qantas ownership arrangements

2.6
At the outset, the committee acknowledges the fact that amendments to
the Sale Act are currently before the Senate Economics Legislation Committee,
and it does not intend to replicate that committee's work. However, this
committee considers some degree of overlap to unavoidable, given the strong
correlation between the Sale Act and the committee's terms of reference.

2.7
Under the Air Navigation Act 1920 (Navigation Act), Australian
airlines including Qantas are required to be at least 51 per cent locally owned
in order to gain access to air routes into and out of the country. The Sale Act
also imposes additional restrictions on Qantas. Section 7 of Part 3 of the Act
imposes restrictions on foreign ownership of Qantas by requiring that:

total foreign ownership of Qantas is not to exceed 49 per cent;

any single foreign investor is limited to a 25 per cent stake in
Qantas; and that

foreign airlines can hold no more than 35 per cent of Qantas
shares in total.

2.8
Qantas has consistently made the point that the Australian domestic
market has been distorted by current Australian aviation policy which allows
its rival, Virgin Australia, to be bankrolled by three totally or majority
foreign government-owned airlines which have a 70 per cent majority ownership
of Virgin while retaining access to Australian bilateral flying rights.[6]

2.9
Virgin began operations in Australia in 2000 as a low-cost domestic
airline and expanded into international travel in 2009. By late 2011, Virgin
Australia was still majority Australian-owned with its largest shareholders
Virgin Group's Vieco 2 Limited with 25.9 per cent and Air New Zealand
Associated Companies Limited with 12 per cent.[7]
In early 2012, Virgin Australia announced a restructure which created a new
entity, Virgin Australia International Holdings Pty Ltd (VAIH) which remained
Australian-owned in accordance with the Navigation Act. This enabled Virgin's
domestic entity, Virgin Australia Holdings (VAH), to have a majority of foreign
investors. As of November 2013, VAH's major shareholders were Air New Zealand
which owns 22.9 per cent, Etihad Airways which owns 19.9 per cent and Singapore
Airlines with 19.9 per cent of shares.[8]

Capacity and competition growth

2.10
The Australian aviation sector has experienced a rapid growth in
capacity in recent years, which has brought about a commensurate sharpening in
competition between carriers. Specifically, according to Qantas, its
competitors have increased capacity to Australia by 46 per cent since 2009,
more than double the world average, at a time of record fuel costs and economic
volatility:

We have met these challenges head on. Over the past four
years, we have been carrying out the biggest transformation since Qantas was
privatised – cutting comparable unit costs by 19 per cent over four years,
introducing new aircraft and technology on a large scale, modernising work practices
and revitalising service. But this is not enough for the circumstances we now
face.[9]

2.11
Mr Gareth Evans, Chief Financial Officer with Qantas Airways listed the
additional contemporary challenges faced by Qantas including an oversupply of
capacity in Australia, with capacity at more than double the rate of the rest
of the world.[10]
Qantas has repeatedly argued that the injection of more than $300 million in
capital into Virgin Australia facilitated a continuation of capacity growth by
Virgin into the domestic market despite its growing losses.[11]

2.12
Additional factors noted by Mr Evans include the high Australian dollar,
a record fuel bill of $4.6 billion, $106 million spent in 2013 on the carbon
tax and the loss of its investment-grade credit rating.[12]
Mr Evans continued:

Remember: unlike many of our international competitors,
Qantas receives no preferential treatment from government—no tax concessions,
no discounts on fuel, no preferred access to airports, no government mandated travel
and no assistance in raising capital or in the cost of our capital, and
less-favourable aircraft depreciation rates than those of our foreign
competitors. Even airlines without official government backing—in markets like
Japan, Canada and the United States—have been able to undertake significant
restructuring with the benefit of government sponsorship. Qantas is simply
asking for a level playing field, and we are confident that in any fair
competition Qantas will win.[13]

2.13
Qantas management has repeatedly stated that Qantas competes on an
uneven playing field and that there are measures that should be taken to redress
the situation. However, when asked by the committee at its hearing what action was
sought by Qantas, Mr Joyce repeatedly stated that Qantas should have the
ability to replicate Virgin's foreign ownership structure:

Virgin has the ability of having 80 per cent foreign
ownership, and they have still maintained the bilateral rights to operate to
the west cost of the United States, to Bali and to New Zealand. What Qantas is
asking for is that if the law allows Virgin to do that it has to be replicated
for Qantas in order to give it a level playing field. If Virgin has a structure
that is acceptable and now allows it to access 100 per cent foreign ownership,
then the same conditions have to apply to Qantas, otherwise we have a
distortion in the marketplace.[14]

2.14
And:

It comes back to the fact that we have allowed Virgin to have
80 per cent foreign ownership now, with three state owned airlines, and have
the ability to have all of its operations conducted offshore, as much as it
wants. If we really want a fair and level playing field we need to have the
same ability for Qantas to have that flexibility into the future. Otherwise,
that distortion will cause even more job losses in Qantas, because it will not
be able to compete.[15]

2.15
However, in relation to the legislative reforms that would enable Qantas
to replicate Virgin's foreign ownership structure the AIPA noted that the 49
per cent foreign ownership limit on Qantas in the Sale Act is tied to the 49
per cent foreign ownership limit on all other Australian-designated
international airlines under the Navigation Act. They note that in both cases,
the limit reflects partial satisfaction of the predominant 'substantial
ownership and effective control' clause of the Air Service Agreements. The
'substantial ownership' clause relates to any Australian-designated
international airline and is the default trigger clause if the 49 per cent
ownership limit is abrogated.

2.16
The AIPA further highlighted that the Navigation Act includes an exemption
provision (Qantas exemption) that ensures that the foreign ownership limits in
the Navigation Act do not apply to Qantas because of the separate but matching
restrictions in the Sale Act. In addition, the Navigation Act does not include
any 'national interest' provisions such as those that apply in the Sale Act.
Therefore, AIPA hold the view that repeal of the Qantas exemption in the
Navigation Act would be an 'essential precondition' to any repeal of the 49 per
cent foreign ownership limit placed on Qantas by the Sale Act in order for the
'playing field to remain level by ensuring all Australian-designated
international airlines are subject to foreign ownership limits in the
Navigation Act'.[16]

2.17
The AIPA also made the observation that the foreign ownership
restrictions set out in the Sale Act which go specifically impose sub-limits on
foreign airlines (restricted to 35 per cent of shares in the airline) and any foreign
person (restricted to 25 per cent) should be repealed.[17]
The AIPA argued that the original rationale for limiting foreign airline
holdings was solely related to bilateral air service agreement requirements
which no longer exist. They make the point that:

The rationale for limiting foreign ownership limits for
individual shareholders, which was always amenable to be controlled through the
Foreign Acquisitions and Takeovers Act 1975, also disappeared almost 14
years ago.

What possible justification could there be to retain those
completely obsolete and irrelevant foreign airline and foreign individual
limits for Qantas, but not for any other Australian international airline?[18]

2.18
The committee notes that the Sale Act not only limits foreign ownership
of Qantas but also places requirements on Qantas to ensure that its maintenance
and other facilities are located in Australia. For these reasons, the committee
does not support the repeal of Part 3 of the Sale Act under the Qantas Sale
Amendment Bill 2014. The committee does, however, see merit in the abolition of
the 35 per cent and 25 per cent sub-limits under paragraphs 7(1)(aa) and (b) of
the Sale Act as they serve no useful purpose. For these reasons, the committee
supports the repeal of the sub-limit provisions.

Recommendation 1

2.19
The committee recommends that paragraphs 7(1)(aa) and 7(1)(b) of the Qantas
Sale Act 1992 be repealed while leaving the remainder of Part 3 of the Qantas
Sale Act 1992 intact (subject to any consequential amendments).

Qantas' management strategy

2.20
The committee took evidence from a number of submitters arguing that
Qantas management seemed not to have a clear and sensible strategy for taking
the airline forward into profitability and growth. Some of the matters
addressed by the evidence included questioning the Qantas Board's experience in
running an airline, the airline's poor fleet planning decisions, its determination
to preserve a 65 per cent share of the domestic market, and the significant
contraction in the number of routes serves by Qantas mainline around the world.[19]

2.21
The committee heard from the Australian Licenced Aircraft Engineers
Association (ALAEA) that:

...the management team and Board over a period of the last six
years has made mistakes and have not deliberately placed Qantas in the position
they are in today. This notion is possible as the Qantas Board does not contain
any person who has worked or been promoted from an operational aviation
profession (Pilot, Engineer, Flight Attendant, Baggage handler, customer
services, etc). The Board consists of the following individuals with the
following qualifications or background:

2.22
The committee also notes queries about Mr Joyce's determination to
maintain the Qantas share of the domestic market at 65 per cent and the
associated decision to respond to added route capacity on Virgin's part by
adding twice the Qantas capacity.[21]
Overcapacity, leading to planes flying with empty seats, with those seats that
are occupied being sold for relatively low yields, is a very expensive and
ultimately unsustainable approach to running an airline. While Qantas argues
that the approach is necessary to preserve its 65 per cent 'line in the sand',
and that a route frequency advantage is a critical component of that, the
committee questions whether a more restrained approach might yield a similar
(and far cheaper) result.[22]

2.23
The committee was also made aware of a dramatic contraction in the
number of routes serves by Qantas mainline aircraft over recent years,
including for example the suspension of flights to:

London via Hong Kong, Singapore and Bangkok, all of which now
depend on codeshares;

Frankfurt, when the committee was told the load factors over the
previous 12 months has averaged 85 per cent;

Perth, Adelaide and Brisbane to Europe (with only one stop), with
Emirates immediately increasing services;

Singapore from Perth;

San Francisco;

Any international destination from Adelaide;

Mumbai (first the Sydney to Mumbai direct service and then the
Mumbai via Singapore replacement service);

Los Angeles via New Zealand;

Buenos Aires, which was replaced with Santiago as a destination, despite
the fact that Santiago is a hub served by codeshare partners LAN Chile and TAM
Brazil.[23]

2.24
The committee heard from Colonial Airways that:

Qantas losses also rose and compounded dramatically here due
to the inconceivable and poorly timed withdrawal and handoff of lucrative
international routes and national markets. This is made crystal clear by Mr.
Oliver Lamb from Pacific Aviation Consulting. Lamb stated in a national Qantas'
future as a strong national carrier supporting jobs in Australia article in
December 2013 "that the struggling airline needed to reconnect with its
Australian customers outside Sydney (read internationally) if it was to return
to profitability". He said further "Qantas had made an error by
slashing international services from Brisbane, Melbourne, Perth and Adelaide in
the past two years, allowing foreign airlines to capture its market share".
"Qantas has spent a lot of money on ventures in Asia, and Jetstar, at the
expense of its international network," Mr Lamb said. This is the crux of
the very reason Qantas has moved backwards. The International arm of Qantas
could not capture the outbound market when the Australian dollar rose against
all currencies. Extraordinarily the Qantas board and Alan Joyce followed the
international reduction philosophy in order to attempt to reduce costs dropping
the international traditional and rite of passage routes such as Melbourne,
Sydney and Brisbane to Singapore and onto Europe (London, Frankfurt and Paris)
as well as the Melbourne and Sydney to Bangkok and London and Melbourne and
Sydney to Hong Kong and London routes.[24]

2.25
These concerns were matched by concerns regarding cuts to, and delays
with the renewal of, Qantas' fleet. Colonial Airways noted in this regard that:

While the Virgin market share battle has contributed
significantly to Qantas’s weakness, Qantas Corporate Management and the Qantas
Board must take sole responsibility and liability for the recent fiscal
outcomes. The reduction in capacity of Qantas International carriage and the
release of extensive routes and reduction of international aircraft hulls,
failed to supply Qantas Domestic Mainline with the inbound carriage so
desperately needed in its capacity war against Virgin.

Significantly Qantas had not upgraded its international fleet
to fuel-efficient B-777 and had released Boeing from the firm orders of the
fuel efficient and technically advanced B-787-900 and was attempting to compete
with 1963 technology and fuel guzzling B-747’s and high cost four-engine A380
aircraft over routes that are suited to wide-bodied twin jets.[25]

2.26
Similarly, Mr Anthony Sheldon, National Secretary of the TWU also noted
that in, contrast to the capital outlays for Jetstar, the Qantas Group failed
to upgrade the premium Qantas fleet to more fuel-efficient aircraft. He noted
that it has cancelled orders for more than 35 Boeing 787-9 Dreamliners, 'even
though Qantas themselves tout the Dreamliners as being able to fly further,
faster and with greater fuel efficiency than any other plane in its class'.[26]

Qantas' $2 billion cost reductions

2.27
In evidence to the committee, Qantas emphasised that while the
legislative process is underway to repeal Part 3 of the Sale Act, its
management was focused on the lowering of the company's cost base. Mr Evans noted
that this would involve significant job losses, cutting capital commitments,
suspending growth in non-essential areas and protecting Qantas' core business
which 'means our domestic market position and the experience of our customers'.[27]

2.28
Mr Joyce informed the committee that 250 projects had been identified across
the company to achieve a projected $2 billion in savings. The 5000 job losses
comprise 25 per cent of the total cost savings and include 1500 support and
back-office jobs as well as 300 jobs in line maintenance and jobs relating to
the Avalon closure as well as changes to Adelaide catering.[28]
The committee heard that there will be a reduction in employees consequent to
the retirement of 767 aircraft in early 2015 primarily impacting cabin crew,
flight attendants and engineers.[29]
However, Qantas were unable to provide details as to the number of jobs that
will be cut with the retirement of the 767s and was unable to explain to the
committee exactly where the remaining 3200 jobs will be cut from.

2.29
Further to job losses, the other 75 per cent of savings are expected to
come from fuel, fleet simplification and unspecified efficiencies.[30]
Mr Joyce explained to the committee that 40 per cent of Qantas' controllable
costs were labour and that proportionately the airline was trying to avoid
impacts on labour compared to other aspects of the organisation.[31]

2.30
Mr Ian Thomas, former aviation journalist and currently a consultant
specialising in aviation, noted that the announcement of the loss of such a
large number of jobs suggested that there was something wrong in the way
management was handling the situation. He suggested that as an alternative,
Qantas management could have phased out the jobs over a period of time or
adjusted the workforce along the way.[32]
Mr Thomas continued:

To get to a stage where you have to announce 5,000 losses
implies a dramatic event within that company. In Qantas's case it was something
that they would have been well aware of some years ago. What I am suggesting is
that if they required job losses—in other words, if the market was getting
softer and demand was heading in the wrong direction as far as they were
concerned—then they would have made adjustments to the workforce over time. It
would not have been some sort of cataclysmic adjustment.[33]

2.31
However, Mr Joyce of Qantas informed the committee that its announced
job cuts and savings plan were not unusual as:

Similar transformation programs in airlines have taken place
around the globe. Recently JAL Airlines in Japan made the announcement that they
were going to make a reduction in their employees of 21,000, 30 per cent of
their employees. They went through a program that lasted well over two years in
order to get themselves back on track. They were losing a lot of money and they
have become the most profitable airline in the world. Air France made an
announcement about a reduction of over 5,000 employees. They have since come
back and said that has increased by 2,800. We have had Lufthansa similarly make
an announcement on job losses. And American Airlines have gone through a
chapter 11 process where they have made 9,600 employees redundant in a
transformation that also took a year and a half or two years to do. It is not
an unusual process in the aviation industry; it is the way these processes have
to work. There are plenty of airlines around the globe that have done it in a
very similar way.[34]

2.32
Nonetheless, the committee considers that Mr Joyce's argument is
somewhat diminished by his own statement that the magnitude of the cuts to
Qantas would be proportionately greater than those undertaken by American
carriers who at the time were fighting off bankruptcy, which suggests to the
committee that the cuts proposed for Qantas are of an unusually large scale.[35]

2.33
The committee raised the question of management responsibility directly
with Qantas management. Mr Joyce was asked whether the board and he, as CEO,
were responsible for the current financial state of the airline. Rather than
declare responsibility for a situation in which the airline is running at a
loss, the share price has fallen dramatically, and the workforce is suffering
dramatic cutbacks, Mr Joyce was evasive, preferring to blame an oversupply of
capacity internationally for the financial state of the airline rather than
management decisions.[36]

Potential impact on Australian jobs arising from repeal of Part 3 of the Sale
Act

2.34
Adding to the committee's alarm at the lack of specificity from Qantas
on the jobs that will be cut, the committee also heard of the significant
potential for further job cuts as a result of prospective changes to the
Sale Act. It was specifically concerned by the potential effect of the removal
of paragraph 7(1)(h) as a consequence of the possible repeal of Part 3 which
would abandon the national interest 'facilities' provisions which:

...require that of the facilities, taken in aggregate, which
are used by Qantas in the provision of scheduled international air transport
services (for example, facilities for the maintenance and housing of aircraft,
catering, flight operations, training and administration), the facilities
located in Australia, when compared with those located in any other country,
must represent the principal operational centre for Qantas.

2.35
In his evidence to the committee, Mr Joyce argued that if Qantas' competitor
has the ability to conduct all of its heavy maintenance and call centres
offshore as well as to access foreign capital, then for Qantas to complete on a
level playing field it needs the freedom to have the same flexibility and
options.[37]
Furthermore, Mr Joyce said that while the loss of 5000 positions had been
announced, he could not rule the prospect of further job losses either in or
out because:

It comes back to the fact that we have allowed Virgin to have
80 per cent foreign ownership now, with three state owned airlines, and have
the ability to have all of its operations conducted offshore, as much as it
wants. If we really want a fair and level playing field we need to have the
same ability for Qantas to have that flexibility into the future. Otherwise,
that distortion will cause even more job losses in Qantas, because it will not
be able to compete.[38]

2.36
Mr Sheldon from the TWU argued that repeal of Part 3 of the Act is
likely to accelerate the process of facilities and jobs in maintenance, administration,
catering as well as pilot positions going offshore.[39]
While unsure of how many positions might end up overseas which could 'run into
the hundreds', Mr Sheldon noted that the ability to hire overseas based pilots
and cabin crew would provide a new opportunity to reduce labour costs and
remove Australia jobs.[40]
Mr Sheldon argued that repeal of Part 3 of the Act would cause:

...significant employment opportunities to move offshore,
including maintenance, catering, flight attendants, corporate staff and, of
course, even pilots. Earning an income that is sustainable in Australia will
become more difficult as competition against labour costs of foreign workers
takes further hold. No longer requiring headquarters and major service centres
to operate from Australia will encourage Qantas to seek lower wage costs
overseas regardless of productivity levels within Australia.[41]

2.37
To support his claim, Mr Sheldon informed the committee that Qantas
Group's subsidiary Jetstar was being prosecuted in the Fair Work Commission for
engaging Thai flight attendants on domestic routes at Thai wages of as little
as $257 per month in breach of Australia law.[42]

2.38
The committee heard similar fears from other employee representatives. In
relation to the national employment interest, Ms Linda White, Assistant
National Secretary, Australian Services Union (ASU) argued that the proposed
repeal of Part 3 of the Act would create a superhighway to exit Australian jobs
from Qantas and Australia.[43]

2.39
The committee notes newspaper reports have suggested that a repeal of
the Act which requires most of the airline's heavy maintenance to be
carried out in Australia could trigger an additional loss of 800 jobs as the
work is likely to move to Dubai.[44]

2.40
Mr Sheldon also argued that as part of this shift towards moving jobs
offshore, jobs which were previously full-time in ground handling have most
recently been job shifted to part-time whereby employees are guaranteed a
minimum of just over 20 hours of work, equating to an income $200 below the
weekly minimum wage.[45]
He informed the committee that at the last round of negotiations between the
union and Qantas which concerned 1400 Qantas employees, it was made clear by
Qantas that there are no full-time jobs available. According to Mr Sheldon,
Qantas would not provide forecasted future rosters which would otherwise
facilitate employees seeking a second job and refused to consider moving half
of its part-timers into full-time work over a period of time in accordance with
operational need. [46]

2.41
Ms White of the ASU noted that 60 per cent of her union members were
operating under a Qantas agreement in which their base rate is between $37,000
and $57,000.[47]
Of those members, 35 per cent are part-time workers. At Jetstar, 500 ASU
members are on a base rate of $42,330 of whom 80 per cent work part time. She
noted that the prospect of an indefinite pay freeze for her members was a hard
thing to ask of them given the fact that they are already low-paid workers.[48]

2.42
Mr Joyce responded to concerns raised regarding the pay freeze across
the Qantas Group by noting that the freeze was imposed to protect as many jobs
as possible. He noted that a freeze was introduced in 2001 after the events of
September 11 and collapse of Ansett. He further argued that, in comparison, the
situation today is far more serious.[49]
He also informed the committee that Qantas management had not asked full-time
employees to convert to part-time but that it may recruit more part-time
employees going forward. However, he also noted that Qantas was recruiting more
part-time employees in an effort to provide flexibility to manage the schedule
because of its 'peakish' nature: 'the schedule can need part-time employees
rather than full-time employees in order for us to meet that'.[50]

2.43
Mr Sheldon argued that voluntary redundancies were offered for current
full-time employees with an intention to undertake forced redundancies to make
up the 5000 full-time equivalent positions to be cut.[51]
He argued that in comparison, Virgin Australia was insourcing more work and
providing guarantees regarding full-time employment.[52]

2.44
It was put to the committee that aircraft maintenance, repair and
overhaul (MRO) capacity arising from the acquisition by Qantas of new aircraft
should be seen as an opportunity to market high quality and highly skilled MRO
services to other airlines. The committee heard that, whereas the last eight
years has seen a growing determination on the part of Qantas to offshore MRO
activity, the critical objective should be to keep as many of the current and
possibly even the recently closed Qantas maintenance facilities in operation
and its workforce employed.[53]
Rather than Qantas management being locked into a mindset of treating MRO as a
cost, it would do better to think like its principal competitors in the
international market such as Singapore Airlines, Malaysian Airlines, Lufthansa
and Emirates which have found very 'profitable synergies in operating an
airline conjointly with an MRO' as a set of world-standard maintenance
facilities and highly experienced workforce could be regarded as an asset in a
rapidly growing world market for contract MRO.[54]

Australian aviation maintenance jobs, aircraft safety and the future of
Australia's maintenance capability

2.45
In a submission to the committee, Dr Doug Fraser, Associate Professor
Ian Hampson, Associate Professor Anne Junor and Professor Michael Quinlan
(herein Dr Fraser et al.) argued that a lack of proper policy oversight
has resulted in the great preponderance of Australia's civilian facilities and
employment in aircraft maintenance being concentrated within one company, which
has shown growing determination over the last eight years to shed as much of
that activity as it can, mainly to overseas providers.[55]
Of aircraft MRO, they noted that:

Even within the alleged constraints of the current
legislation, Qantas has already closed a number of facilities of critical
strategic importance, not only to Australia's current aircraft maintenance
requirements, but to its future prospects of building a competitive presence in
an increasingly globalised market worth an estimated $70 billion a year at
present, and likely at least to double within the next 20 years. Looking purely
at the civilian sector, there has been little evidence of any new stand-alone
MRO enterprises with the potential to grow anywhere near the size which would
be required to handle the predicted future maintenance load even for the major
airlines, let alone for other sectors of Australian aviation.[56]

2.46
Within this context, Dr Fraser et al. raised specific concerns
about the future supply of fully qualified aircraft maintenance engineers, with
training for this occupation declining in parallel with the decline in Qantas'
apprentice program. Civilian recruitment, net of wastage, in the March quarter
of 2013 was the lowest it has been since records were kept. However, of even
greater concern to Dr Fraser et al. was the loss of capacity in
the training system which has accompanied the drop-off in apprentice demand. In
terms of skills supply in the aviation industry, they argued that Qantas was
working on the assumption that there will always be capacity in low-wage
countries to take on maintenance work which it is no longer prepared to carry
on in Australian shops while the rest of the industry is working on the
expectation that it will be able to meet the ongoing skill needs either from
displaced or disaffected Qantas workers or from skilled defence personnel
moving into civilian work.[57]

2.47
At the same time, however, they note that the International Civil
Aviation Organization (ICAO), IATA and a number of authoritative international
sources have expressed concern that most regions of the world will face a
growing shortfall of skilled aircraft maintenance engineer (AME) labour over
the next 20 years. Dr Fraser et al. note that in Australia's case, the
capacity of the training system to respond has been 'so badly degraded' that it
is arguably time to describe the situation as a crisis'.[58]

2.48
Dr Fraser et al. raised serious concern that
many countries might respond to a chronic inability to meet demand for properly
skilled labour by resorting to the use of unqualified personnel, intensifying
the work of those skilled engineers who are available and skimping on internal
quality control.[59]
They highlighted the:

Current crisis of Australia's civilian training in aircraft
maintenance skills, the inadequacy of the current supply to meet future
Australian needs even in circumstances of maximum offshoring, and the predicted
shortfall of skilled labour supply in most regions of the world which is likely
not only to negate much of the cost advantage of offshore maintenance, but to affect
the viability of relying on it as a primary means of meeting Australia’s
airworthiness requirements beyond the short term.[60]

2.49
The committee heard concerns that this might already be occurring,
though not so much for lack of skilled labour as for a desire to save money. Mr
Sheldon argued that in terms of the safety and security of aviation, standards
have slipped at Qantas. Qantas was not named amongst the top ten safest
airlines in the world by the Air Transport Ratings Agency in 2011.[61]
An article in the Daily Mail dated 30 August 2011 noted that Qantas had
dropped out of the top airlines when it comes to safety following a string of
high-profile incidents over the past three years, including A380 engine
explosions, tyre blowouts and landing gear malfunctions.[62]
Mr Sheldon further noted that:

It is the position of the TWU that these engineering and
mechanical shortcomings can be directly linked to the process of offshoring
jobs, which has become increasingly apparent in Qantas under the direction of
the present board, and also the outsourcing of work within its own supply chain
and disengagement of its own workforce.[63]

2.50
This evidence was supported by Mr Stephen Purvinas, Federal Secretary of
the ALAMEA. According to Mr Purvinas, the key difference between maintenance at
Australian facilities compared overseas is the number of licenced aircraft
engineers (LAMEs) deployed to maintain aircraft, and oversee maintenance work
carried out by unlicensed engineers. Whereas traditionally in Australia, one
LAME would lead a team of three, checking and verifying the work of the two
unlicensed aircraft engineers who made up the team, the ratio is 1:8 in Hong
Kong, 1:11 in Singapore and 1:22 in the Philippines.[64]
According to Mr Purvinas, a LAME who has to supervise more people will not
necessarily be able to certify and supervise their work as comprehensively as a
LAME who has to oversight and check the work of only two others. He questioned
the quality of maintenance conduced offshore at these facilities for these
reasons.[65]

2.51
However, the committee notes Mr Joyce's rejection of the suggestion that
the rate of mistakes in maintenance conducted overseas was any higher than that
which has occurred at onshore facilities. In this regard, he noted that:

The processes and procedures we put in place are there to
make sure that we track those errors and fix those errors when they occur. And
there is no difference between the facilities.[66]

2.52
Mr Joyce informed the committee that every maintenance operation carried
out on Qantas aircraft is certified by the local regulator as well as the Civil
Aviation Safety Authority (CASA). He explained that Qantas has a team that
accompanies every aircraft for maintenance and supervises that work while
quality assurance staff members are responsible to assess each maintenance
facility. In this way, all maintenance that takes place regardless of whether
it is undertaken offshore or onshore is monitored.[67]

2.53
However, Fraser et al. argued that there are grounds to suspect that,
due to resource constraints, CASA is unable to inspect overseas MROs with
sufficient frequency and that they 'suspect that the supervision regime of
offshore MROs (and the organisations to which they may outsource) cannot
guarantee safety or even 'compliance''.[68]
Fraser et al. commended to the committee the need for ongoing inspection
of offshore maintenance facilities to ensure good practice.

Staff morale

2.54
It should come as no surprise that changes such as those outlined in
this report have apparently had a sharp negative impact on staff morale, and
the reputation of management among the airline's workers. Mr Purvinas informed
the committee that an industry survey conducted by the association revealed
that 3 per cent of Qantas engineers and 3 per cent of Qantas pilots believed
that the company would improve in the next 12 months compared to 84 per cent of
Virgin engineers and 91 per cent of Virgin pilots in relation to the Virgin airways.[69]
When asked if they trusted the people running their respective companies, 1 per
cent of Qantas engineers and pilots responded that they did compared to 38 per
cent of Virgin engineers and 54 per cent of Virgin pilots.[70]

A national carrier in the national interest

2.55
Attention was drawn to Qantas' long and exemplary history of service
during periods of national emergency.

2.56
During the Second World War, when Singapore fell to the Japanese, Qantas
crew operated unarmed aircraft on dangerous missions as the Japanese forces
advanced southwards through the islands. Qantas crew later served in the battle
zones of New Guinea. Combined Qantas and RAAF personnel flew Empire flying
boats and Lockheed Lodestars, dropping supplies to Australian troops flying
along the Kokoda Trail. In 1942, Qantas, the British Air Ministry and BOAC
(formerly Imperial Airways) launched an operation to re-establish the
Australia-England air link that had been cut off by advancing Japanese forces.

2.57
By the time the operation ended in July 1945, 271 crossings of the
Indian Ocean had been completed covering more than 1.5 million kilometres and
carrying 648 passengers. During the Vietnam War, Qantas carried out between 203
and 250 charter flights between Australia and Vietnam with approximately half
of all Australian troops who served in Vietnam transported by Qantas aircraft.
The Australian National Airlines Act 1945 gave the government the power
to co-opt Australian airlines into the military effort and RAAF planning was
based on the availability of Qantas aircraft.[71]

2.58
Thereafter Qantas established a world record of carrying the most
passengers when it evacuated 673 people on a 747 flight from Darwin after the
city was devastated by Cyclone Tracy. A total of 4925 people were flown out by
the airline.

2.59
During the days following the Chinese Government's response to the
Tiananmen Square protests of June 1989, Qantas airlifted hundreds of
Australians stranded in Beijing. After the Bali bombing in October 2002, Qantas
evacuated wounded Australians to Darwin and to burns units around the country,
transported more than 4500 from Bail to Australia and deployed its own and
other medical personnel to Denpasar to provide medical assistance.

2.60
Firefighters were transported by Qantas during the bushfires in Sydney
and Canberra over the 2003 summer while in 2006 Qantas supported the evacuation
of Australians caught up in Lebanon's war zones. Qantas has subsequently
provided assistance to the 2009 Victorian bushfire emergency, evacuation of
Australians from Egypt during the political unrest of 2011 and transported
Australians stranded by the Fiji cyclone in April 2012.

2.61
The committee heard, and agrees wholeheartedly, that it is neither in
the interest of national security, the national economic interest nor in the
national employment interest to have Qantas 'sliced and diced', and that Qantas
was bequeathed by the Australian public under a contract with the Australian
public through Parliament.[72]

2.62
The committee is pleased to note that Mr Joyce recognised Qantas as a
national strategic asset with the capacity to provide aircraft, personnel and
expertise to Australia in a crisis, and that he predicted Qantas would continue
to play that role in the future.[73]

2.63
Nonetheless, the committee expresses its concern at the potential
implications majority foreign ownership when the strategic objectives of
foreign owners may not accord with those of the Australian Government and
Australian citizens who may require assistance in dire situations, remote locations,
and at short notice. The need to ensure Australia has a resource it can call on
in such situations should be a serious strategic priority.

A debt guarantee

2.64
Prior to the announcement of the repeal of the Sale Act, Qantas had been
seeking a guarantee from the Australian Government for the company's bank and
corporate bond debt which would have enabled it to access debt from global
markets at cheaper rates. A government debt guarantee would enable Qantas to
secure its investment-grade credit rating which is vital to the airline
securing debt at cheaper rates than its rivals. The move would have reportedly
saved Qantas tens of millions of dollars.[74]

2.65
On 3 March 2014, the Prime Minister the Hon Tony Abbott MP and the
Treasurer, the Hon Joe Hockey MP announced that the government would not
provide the guarantee. During the announcement, Prime Minister stated that the
government's decision to deny a debt guarantee and repeal the Sale Act would
open Qantas up for foreign investment while also acknowledging that it could
send maintenance jobs overseas:

If some jobs have to go offshore in order to ensure that
Qantas has a strong and viable long-term future, it may be regrettable, but
nevertheless it is the best way to guarantee Australian jobs for the long term.[75]

2.66
When repeatedly asked by the committee if Qantas management wanted a
debt guarantee, however, Mr Joyce was evasive, stating that the matter was now
academic as:

We have gone through the process with the government. The
government has made this decision, and the government has decided that the
repeal of section 3 of the act is the way to go, and we support that decision.[76]

2.67
The Australian Council of Trade Unions has voiced support for a debt
guarantee subject to a commitment from Qantas to project workers against job
losses and 'on the airline demonstrating they have a sustainable long term
business plan which is not reliant on a spiral of job cuts'.[77]

2.68
Dr Fraser et al. argued in favour of a debt guarantee on the
basis that it would provide the Commonwealth with a legitimate case to impose
behavioural regulation on Qantas to separate off its MRO capacity for the
purposes of developing a viable and competitive stand-alone MRO organisation.
They argued that while there are a range of models for a more circumscribed and
conditional type of guarantee, Qantas had derailed discussions to the extent
that it posed the issue as a simple choice between an unconditional, unlimited
guarantee, and no action. Dr Fraser et al. suggested that, independent of any
other conditions imposed on such an investment, a debt guarantee might be:

applied for a defined term, subject to periodic review by
Parliament;

limited to a set maximum amount of debt (again subject to
periodic review);

applicable only to investments made by the original entity Qantas
Airways Limited in pursuance of operating domestic and international air
services under its current business name, consistent with the existing
legislation;

hypothecated to the extent that it cannot cover funds borrowed to
cover recurrent business costs or for the operation or development of
businesses located or incorporated outside Australia;

subject to monitoring by the Auditor-General; and

subject to specific requirements in the case of default or
bankruptcy, including a provision that the Commonwealth be the first secured
creditor after staff entitlements have been paid.[78]

2.69
One such option would be to impose specific obligations such as the use
of Australian maintenance facilities for a specific minimum percentage of the
airline's maintenance budget as a condition of the guarantee. Other suggestions
raised by Dr Fraser et al. include the 'golden share' which the
Singapore Government holds in many of its quasi-state enterprises. Such a share
would convey specific rights not available to any ordinary shareholder such as
the requirement for ministerial approval in relation to board or senior
management appointments.[79]
In regard to a debt guarantee, Dr Fraser et al. made the point that:

Put differently, imposing public interest conditions on the
guarantee would be an effective way, both of testing the sincerity of Qantas'
claims to be put at a competitive disadvantage by the constraints of its
equity, and of reassuring the public that favours were not being done to an
individual business to compensate for its own lack of commercial acumen.[80]

2.70
However, Mr Thomas of CAPA Consulting held the view that a debt
guarantee would provide access to cheaper capital but which would not be
adequate as any assistance would have to address Qantas' cost base.[81]

2.71
Mr Joyce clarified that the issue of a debt guarantee and repeal of the
Act were separate issues. He noted that the removal of $2 billion in costs was
directed at getting the business back to profitability. Separately, repeal of
the Sale Act goes to the issue of balancing the playing field of the domestic
market.[82]

Committee view

2.72
The committee recognises the fundamental importance of an economically
viable and competitive Qantas to Australia's economy, security and infrastructure.
Qantas is Australia's national carrier and unlike any other airline, holds a
unique position within Australia and abroad as a distinctively Australian icon.
The Australian character of the airline must be preserved. The committee notes
that even if the foreign-ownership restrictions were removed, the question
remains as to whether Qantas would be able to attract major foreign airlines as
investors. A debt guarantee, however, provides the necessary certainty Qantas
needs to remain competitive.

2.73
The committee holds the view that it is fundamentally important that the
Commonwealth Government act on behalf of Australia's interests and accordingly
it recommends a debt guarantee be offered to Qantas. In light of the evidence
to the committee regarding future worldwide aviation skills shortages, any
further loss of Qantas' skilled workforce and MRO facilities is very clearly
not in the national interest. The committee believes that a debt guarantee
would provide the necessary financial certainty that Qantas requires to remain
competitive both domestically and globally while maintaining a modern fleet
serviced by a skilled Australian workforce.

2.74
In light of its financial state, Qantas has not upgraded its
international fleet to the fuel-efficient Boeing 777 and technically advanced
787 Dreamliners. However, the provision of a debt guarantee would provide the
opportunity for Qantas to upgrade its international fleet, a process widely
agreed to be critical if Qantas is to remain internationally competitive. an efficient and modern fleet is also important
to the national interest if Qantas is to maintain the capacity to serve
Australia, particularly during periods of national emergency.

Recommendation 2

2.75
The committee recommends that the Commonwealth Government provide a debt
guarantee to Qantas Airways.